Category Archives: Investing Money

How Much Stock Should You Have in Your Retirement Accounts?

bear-market--My Comments: This question has been asked every years for the almost 30 years that I’ve called myself a financial professional. Unfortunately, there is no best answer. Human nature, in the form of doubts, confidence, expectations, past experience, impatience, timing and fear, all conspire to force our hand when attempting to make intelligent decisions. Good luck!

May 7, 2016 – Jane Hodges – MarketWatch

It has been seven years since the start of this bull market for stocks in the U.S. Is it time for investors to adjust the equity allocations in their retirement portfolios?

Many financial advisers say yes. But that is where the consensus seems to end. Some believe that investors should start to reduce the amount of money they have in stocks. Others, however, argue for sustaining the stock allocation. What they do have in common is that they believe it is time to tinker with the models, while weighing different reasons to move the stock needle up or down.

There is no universal prescription for equity allocation, of course. Much depends on a portfolio’s size, an investor’s age and how soon he or she wishes to retire. Expectations for annual stock returns have ratcheted back since the stock market recovery began in 2009, with many financial planners modeling for annual returns in the 4% or 5% range, down from as much as twice that before the 2008-09 recession.

Meanwhile, the reduced outlook for equities still exceeds expected returns for other asset classes. But for many, all of the volatility of late makes the near-term risk/reward proposition for stocks less appealing.

“Returns expectations have ratcheted down, but the expectation of short-term volatility in the market continues,” says Christine Benz, director of personal finance at fund researchers Morningstar Inc. MORN, -0.04%

Other factors affect allocation decisions, too, such as whether an investor’s portfolio has been rebalanced along the way, or whether it has passively wandered into an inappropriate asset mix for the person’s risk tolerance or goals.

Benz notes than an investor with $10,000 invested in a 50% stock, 50% bond-related portfolio in 2009 would have seen—if the portfolio were left unchecked—a transition to a 70% stock and 30% bond allocation by the end of 2015.

The good news? The investor’s money would have grown substantially. The bad news? So would the risk exposure.

Here is a look at four percentages of stock allocation for an investor to consider, and the types of investors that might want to consider each of the levels. (To see all four examples, click the palm trees below)


Five Truths Every Investor Needs to Know: #1

global tradeMy Comments: This is the first of five “truths” that appear in a brochure published recently by Invesco, a global wealth management company with offices in over 20 countries, serving clients in more than 150 countries.

As you consider your wealth, or lack of it, these ideas may serve to keep you grounded and making better decisions. As someone who has made both good personal decisions, and bad ones, this might prove helpful to some of you.

Also, my wife and I will be traveling for the next several days. Those few of you who follow these posts, please know I’ll be ‘retired’ until May 5th at the earliest.

#1 – The Truth About Gains and Losses

Myth: My portfolio will be in fine shape if it has more up years than down years.

You may have heard that because the stock market’s good years have far outnumbered its bad years, equities are a good play.

It’s true that from 1926 to 2014, the S&P 500 Index has posted 65 positive years and only  24 negative years. If your investment portfolio were scored by “match-play” rules, like tennis, that would be good news because you’d win if up years outnumbered down years. How well your portfolio performed in each of those years wouldn’t matter.

Truth: The magnitude of gains and losses counts more than their frequency.

In reality, portfolios are scored under “stroke-play” rules — like golf. In stroke play, it doesn’t matter how many individual holes you win, it’s the total score that counts. Mistakes on just a hole or two can ruin an otherwise well-played game. Likewise, in investing, it may take just one or two exceptionally bad years to push you off the investment path to victory.

As the decade from 2000 to 2009 showed us, it’s possible for the market to have more up years than down years, yet still lose money on average. This decade included six up years and four down years, yet resulted in a total return of -9.10%.


Action: Understand the market’s scoring system and design an investment strategy accordingly.

Now that you know how the market keeps score, ask yourself this: What does it mean to achieve victory in investing? Does it mean my portfolio made money during the years I invested? If that’s the measuring stick, then victory is easy to achieve, according to the following chart. All you’d have to do is invest in the stock market for 10 years — nothing else. Historically, that strategy has yielded positive returns 95% of the time. But, of course, it’s not that simple.Scratching

The investment plan you and your financial advisor map out as a path to your goals assumes a certain level of contributions and an average rate of return over an investment lifetime — typically a return of 10% or more from an investor’s equity allocation for a plan to be on target. Simply scoring positive returns doesn’t mean you’ll reach your goals.

The true victory in investing is achieving your financial objectives — retirement, home ownership,a child’s college education — not merely making money over your years of investing. If your portfolio doesn’t make enough to reach your goals, then you haven’t really won. And, as we’ve seen, just one or two exceptionally bad years can throw you off course. That’s why you need an intentional approach to investing with an asset allocation strategy that seeks to balance downside protection and upside participation instead of one that chases returns at the expense of risk management.

Top 10 Phrases from Bank Lobbyists and their Translation

bear marketMy Comments: On April 6, 2016, rules were introduced into the US financial system that will cause more of us to treat our clients better. At least that’s the plan.

Wall Street firms have been resisting this change for years, and while the following Top 10 Reasons Why are tongue in cheek, there’s a whole lot more truth here than most of us choose to believe.

1) This new standard will limit investors’ choice of retirement options.
“This new standard will definitely limit my choice of yachts.”

2) Investors will “go it alone” and screw up their asset allocation.
“My Wolf of Wall Street theme party will have a totally inadequate seafood buffet.”

3) Rather than provide advice, advisors will sit on their hands for fear of legal reprisals associated with a fiduciary standard.
“Shhh. Don’t tell anyone there is a robust independent advisor ecosystem already available in the economy.”

4) New, innovative products will not be introduced to the marketplace.
“New, highly profitable, poor performing products will not be introduced to the marketplace.”

5) It’s not about the price you pay, but rather, the value you receive.
“It’s not about the price they pay, it’s about the soft dollars, revenue shares, and kickbacks we receive.”

6) Our legislative partners stand ready to protect investors and the middle class.
“We have taken every Congressman out for a lovely steak dinner and we will continue to do so.”

7) We have the best facilities in the world to provide cutting edge research and leading market insights.
“We pay the highest rent in Manhattan and hired a bunch of busted PhD students who can write fancy equations.”

8) Our robust advisor network fully leverages our economies of scale to provide superior service.
“We send our advisors canned reports and shoddy back office services and charge them 50% of their revenues.”

9) We have been in the business for centuries.
“We have been exploiting clients for centuries.”

10) Our clients see the value we provide. They understand that we are well worth the price.
“Please don’t go to Vanguard. Please don’t go to Vanguard. Please don’t go to Vanguard.”

A Chilling Message About The Stock Market

roller coasterMy Comments: This is about something called an IPO. For the uninitiated, this is an Initial Public Offering. It’s when a company, new or old, attempts to raise capital by offering shares representing an ownership interest to the general public. It’s like a giant, global auction. It’s not the final bid that determines how much money the company will raise, but what happens next. The problem right now is there aren’t many IPOs which suggests a lot of reservations about the short term financial future.

by Wold Richter, April 2, 2016

A stock market that has rallied sharply to ludicrous valuations is normally accompanied by a booming IPO market. They’re like twins. The S&P 500 jumped 13.5% in seven weeks – to bring it back up to flat year-to-date, a lofty perch, though down a smidgen from its all-time high in May 2015. But year-to-date, the IPO market is in the worst shape since 2009. Something has to give.

“Either the IPO market is going to pick up, or the stock market is going to pull back, but it’s hard to envision both conditions peacefully coexisting,” Jack Ablin, chief investment officer at BMO Private Bank told the Wall Street Journal.

In the US, only 8 IPOs made it through the window in the first quarter, according to Renaissance Capital’s Quarterly IPO Review, dated March 31. They were all early-stage medical device or biotech companies. Two from China. Not a single one has a product or revenues.

Also three blank-check companies made it out the gate, with the idea of buying up assets as they become available, but Renaissance Capital did not include them in the above tally. The Wall Street Journal pegged the total number of IPOs at 9, including the three blank check companies but excluding the two China-based outfits, which are already publicly traded elsewhere.

This was the lowest number of IPOs since 2009. And the total amount raised – $1.2 billion for all of them – was the smallest in 20 years. Another 9 IPOs got postponed at the last minute, and one was withdrawn altogether. No Tech IPOs at all.

It was the first quarter without any private-equity backed IPOs since Q1 2009. PE firms had loaded up on Leverage Buy Outs or LBOs before the financial crisis. After years of booming stocks, they thought it would be a good time to unload. Some did in 2014 and 2015. Most of those struggled. And this year? Renaissance Capital.

The last LBO to go public was KKR’s payment processor First Data in October 2015; since then, it has vastly underperformed its peers. A spate of large PE-backed IPOs have waited in the pipeline since the 2H15, including Albertsons, Neiman Marcus, Univision and Laureate Education.

Another big-name LBO queen waiting in the wings is US Foods Holding Corp. But for now, PE firms seem to be stuck with their LBOs.

During the quarter, when the S&P 500 index was about flat, the Renaissance Capital IPO index fell 7%. Not exactly an enticing environment.

One of the problems pre-IPO companies face is their mega-inflated “valuation,” the infamous “unicorn” syndrome where startups have to be valued at $1 billion or more, by hook or crook, to where even SEC Chair Mary Jo White made it a point yesterday to come out to Silicon Valley herself and warn power brokers and money gurus about “fraud” in these valuations that not only hits employees and others that end up with these shares directly or indirectly, but also filters through institutions to retail investors.

“The concern is whether the prestige associated with reaching a sky high valuation fast drives companies to try to appear more valuable than they actually are,” she said at one point. No kidding. The SEC is watching out for us – after the damage has already been done.

So to get out the IPO window, some companies had to discount the “valuation” they had as a private company. Square, which had a valuation of $6 billion as a private company, went public at half that last year. Despite doubling since its low in February, including a curious spike over the last few days (what is Wall Street trying to accomplish?), it’s still $1 billion short of its valuation as a private company.

And that kind of valuation markdown – 50% in some cases – is a scary thought for current investors and employees who might see that perceived wealth disappear entirely if they came late to the game.

There are now 42 companies in the IPO pipeline with new or updated filings since January, according to Renaissance Capital, including a gaggle of private-equity backed LBOs and 11 revenue-less biotechs similar to the ones that just wobbled through the gate. But so far it doesn’t look very good for them in the second quarter either.

“It’s kind of unprecedented for the general stock market to be so close to record highs and yet so little IPO activity,” Jay Ritter, professor of finance at the University of Florida, told the Wall Street Journal.

Now everyone is waiting for the icebreaker, that one big company with real revenues and preferably even earnings to pull off a successful IPO. Then everyone else can follow. That’s the meme. So who dares to be next?

On a global basis, the IPO picture was dreary too. Only 167 IPOs made it out the gate, the lowest since 2009, the Financial Times reported. Even worse: 17 IPOs were “scrapped” at the last minute, or 10% of the total, an unheard-of proportion. As in the US, stock market “volatility” got blamed.

But the past seven weeks, markets have been soaring and volatility as measured by the Volatility Index (VIX) has settled back down to historically low levels, and still the IPO drought persists.

So could it be something else?

Turns out, investors don’t seem to believe in the rally. They fear that the rally was the product of a majestic short-covering panic, a classic bear-market rally that traders rode up as far as they could – that it wasn’t in fact the beginning of a new bull market. But a bull market is precisely what it would take to dump these overvalued IPOs on a blindly exuberant public. And the IPO gurus, with all their insights and perspective, don’t seem to see that bull market.

They have their reasons. Not all is rosy. Business revenues and earnings are down, productivity is down. And now layoffs are reaching far beyond energy.

Why You’ll Need to Own More Stocks After You Retire

retirement_roadMy Comments: For many of us, retirement once seemed like a glorious goal to achieve. Now that many of us are here, the light isn’t so bright.

As a financial planner, both for myself and others, the landscape is very different from what it was as little as twenty-five years ago. The fundamentals are the same, but how you get there is very different.

These comments from Ryan Derousseau speak to some of the changes in the landscape.

March 26, 2016 by Ryan Derousseau

Unless you’re already unspeakably rich.

Retirement planners like to relay best practices to clients via simple, easy-to-understand rules. Whether it’s sticking to a 4% yearly withdrawal rate or having your bond exposure match your age, these rules-of-thumb have translated into investing strategies for years now.

Of course, these tips come with plenty of research to back them up – a 4% withdrawal rate has a strong chance of lasting a lifetime, for example. But sometimes these rules get turned upside down.

One rule undergoing such an evolution has to do with stock exposure during retirement. For a long time, conventional wisdom has held that your stock exposure should steadily decline as you age. But a growing number of experts think that today’s retirees need to keep much more of their portfolio in the stock market than they might expect.

In the past, when the typical retirement lasted 10 to 15 years, there wasn’t a huge need for stocks in the portfolio. But, the “retirement time horizon has gone up,” says Stuart Ritter, vice president at T. Rowe Price Investment Services and a financial planner at the firm.

With people living longer, the need to take on the risk of stocks (in return for the potentially greater reward) has increased. Though inflation has been low lately, its threat to the value of your retirement savings grows with greater longevity: While a dollar’s value may not decrease much in a decade, it will decrease a lot over 35 years.

These trends have led a growing number of financial planners to advocate a rising equity “glide path.” While this idea isn’t as easy as others to sum up with a platitude, the basic idea is that your exposure to stocks should increase, rather than decrease, as you age in retirement.

Working with the American Institute for Economic Research, Luke Delorme conducted a study to determine the ideal asset-allocation strategy for retirees, assuming a 4% withdrawal rate. The best strategy, he found, was to begin with a 20% allocation of stocks as you enter retirement at age 65, and then increase that allocation gradually every year, over 30 years, until you have a 70% equity exposure at age 95.

“The time that people need to be most conservative is not in retirement,” says Delorme. “but at the beginning of retirement.”

Here’s why: Your portfolio is most vulnerable to risk right after you retire. If the market takes a tumble during the first few years of your extended vacation, then it’s difficult to rebuild your portfolio without going back to work. So keeping stock exposure low at that point protects you from the potential of losing out in the beginning of retirement. But since stocks have historically risen an average of 7% a year over the long-term, gradually increasing your exposure over time increases your odds that your portfolio will last into your later years.

If you have a pension, you can take a bit more risk, says Delorme, who now works as director of financial planning at American Investment Services. You can have a higher allocation of stocks when you leave the workforce, and you can increase stock exposure to 80% within retirement.

T. Rowe Price’s Ritter explains the glide path concept differently. He places client assets into two buckets – one for the first 15 years of retirement, the other for the second 15. In the “first 15” bucket, assets be concentrated in on safe, short-term investment vehicles like bonds and fixed income. The second 15 years’ worth of savings goes into stocks. Placing clients’ money in the two buckets, Ritter says, “helps put the short term volatility” of the market into the context of a broader strategy; investors who know their short-term needs are taken care of are less likely to get scared and pull money out of the market.

While they may not use the term “rising equity glide path,” more financial planners are latching on to the idea of increasing stock exposure in retirement. You often hear of a 50-50 stock to bond ratio for retirees these days. And if you have a higher withdrawal rate, chances are you will also need to take on more risk (unless your nest egg is truly massive). “The biggest driver is less around the allocation of risk,” says JPMorgan Private Bank’s David Lyon. Instead, it’s based on “how much you’re spending on your balance sheet.”

In other words, if you have expensive tastes, then you may want to get used to living with more risk. That’s not a cliché; it’s life.

6 Charts Suggest a Stock Market Correction Soon

roller coasterMy Comments: Like me, you don’t have a clue what’s going to happen either. But these charts help give you an educated guess.

John Mauldin, Mauldin Economics Dec. 20, 2015

The S&P 500 index is flat for the year, but that hasn’t been due to a lack of volatility. The index has traded within a 259-point range in 2015. This year is shaping up to be a disappointment compared to the stellar returns on stocks in recent years: 13.5% in 2014, 32.2% in 2013,15.9% in 2012.

The outlook for 2016 is even worse.

These six charts make a very compelling case for a stock market correction in the near future.


The Fed’s Rate Hike – What it Means

My Comments: In the past months and years I’ve featured the comments of Scott Minerd, the Chairman of Investment and CIO of Guggenheim Partners. This organization is not big, relatively speaking, as they ONLY have about $250 billion under management. (I could live very well on a tiny fraction of what that amount earns every year.)


He appeared on CNBC the other day. In my opinion, he has a terrific grasp of how money works and articulates it very well. If you are interested, click on the image above where you can see and hear what he said. It lasts about 7 minutes.